Category: Work

Over the past few weeks, it feels like the marketing discussion around Ad Blocking has reached a fervor, particularly as Apple started allowing Ad Blockers on Mobile, pushing awareness of ad blocking into the mainstream. Let’s discuss the future of ad blocking and digital advertising.

Situation

Most content publishers (whether large like The Wall Street Journal or small, like this lowly website) generate revenue by showing advertisements. However:

People (usually) hate ads

Ad Blockers (AdBlock likely the most well known) have been around for the last ten years

The decline of newspapers has shown that in most cases, people are unwilling to pay for content, thus subscription revenue is not a valid option for most publishers

Publisher Point of View

Publishers can claim ad blocking is similar to media piracy (music, movie downloads). I feel this argument is valid – they provide content on the implied agreement that you will accept (and click on, if appropriate) the ads they show. Using ad blocking breaks this agreement. If 30% of your readers are not viewing ads, 30% of your traffic is not (simplified argument) generating revenue.

Advertiser Point of View

Advertisers are not as affected by ad blocking, in the sense that blockers prevent ads from even being rendered, thus they are not affected when paying under CPM (cost per thousand impressions). However, I wonder what percentage of users who are blocking ads would be affected by ads if people saw them. For example, if these users are more affected by ads than non-blocking users, advertisers are missing out on a more lucrative (cost effective) source of conversion. The other effect is that CPM rates could be higher than they should be (but not CPC – cost per click) because CPMs now have to address the cost of providing content for users who use ad blocking in the CPM figure (cost of creating content for 100% of viewers charged over the 70% actually viewing without blockers). However, this should not actually be the case for ad inventory that is simply going to the highest bidder through programmatic means.

User Point of View

As you are reading this, imagine, would you look at ads if you didn’t need to? I would guess not. Regardless of medium, if you can get something for “free” (consume content without ads, not pay directly for content) easily, you will – when piracy was easier than dealing with DRM content, piracy ruled. Perhaps threat of lawsuit affected some, but overall, ease of piracy forced content creators to deliver better products, value-added services, and more reasonable pricing that rendered piracy less damaging. You can see this evolution in Spotify (subscription / in-app ad music buffet) for music, Hulu (similar to Spotify) and Netflix for movies & tv content.

Despite news like IAB Starts Publicity and Engineering Battle Against Ad Blocking, most people do not (and will never) care about ethical concerns. Organizations like the IAB may threaten to sue ad blocking software companies, but it is easy to see this will be a wasteful, and ultimately losing (see battles against torrenting) long term battle. The individual user will always do what is best for himself, which in this case is a faster, smoother internet experience with ad blockers. Just as with piracy, no matter the number of lawsuits or technology battles, ad blocking itself will always be easily available.

I have used ad blocking for extended periods of time over the last decade. Through my work in marketing and advertising, however, I forced myself to turn blocking off at times to make sure I understood the changes in advertising and the ways advertisers are trying to gain attention. While there are sites that do effective advertising, how many times have you been interrupted in similar ways to the following?

Watch a 2 minute video, forced to watch a 15 second ad. If given the option, you press skip as soon as you can.

Click a link, greeted with an ad right away.

Go to a website, and audio starts playing somewhere. You spend several seconds looking for it and turning it off. Particularly annoying at night or in an environment in which the sound is disruptive to others.

New browser windows and popups appear randomly

Looking for a download link, you see banners trying to trick you that the download is through the banner instead

Often, the content payoff is not worth battling through the ad, and even if you do look at the ad, are you really in the positive mindset to evaluate the ad properly? I think more often than not, I am more likely to attach my negative mood to the ad at a subconscious level. These ads may thus harm both the advertiser and the publisher beyond just the user bouncing away from the content entirely, as I often do.

When it is a case of choosing the individual versus the big “evil” corporation, the individual always knows who to choose. Herself.

Evolution of Ad Blocking: Throwback to Traditional Media

I believe that while publishers may fill up headlines with complaints today, they will eventually realize and act on addressing users’ root needs for ad blocking.

Let’s look at advertising in traditional media as references. In these, advertising is often done naturally, at a pace that does not interrupt your natural media consumption experience. For example, in television, advertisements are inserted in break periods, and as you watch, you build a general feeling of when it is commercial time. Writers write for advertisement breaks, making sure the pacing doesn’t jar you, that scenes naturally lead to and out of breaks. Product placements (i.e. character drinks Sprite) are done naturally. In magazines, ads are shown in the natural manner that you read the publication. As you turn pages to read articles, you sometimes see an ad, which you can then turn over after glancing at it. In newspapers, sections with ads tend to be inserted in a way in which your eyes are not bouncing back and forth between content and ad, fighting to keep focus.

Imagine however, you are reading a magazine, and an ad pops out at you, as in a pop-up book. Or on TV, mid-joke, there is a 15 second interruption with an ad.

My natural response would be, this is ridiculous! I would likely stop watching or switch to content that does not disrupt me. This is often how I see my experience with internet advertising.

Ad blocking will continue to rise in the short term. This will create revenue issues for many publishers, but this will also force publishers, as music and video companies did, to adapt their models.

Companies will adjust (as they always have, just as in this example: Google says it won’t make advertisers pay unless ads are 100% viewable). In an evolutionary sense, if a world with ad blocking is not sustainable for publishers, this is the next step. If users refuse to look at ads, publishers will look at new revenue models. Or even return to old ones, like subscription.

Smaller, individual sites will be unable to command subscription fees, or enough in donations. These sites will either die, or aggregators will appear providing subscription revenue for a network of sites. Does this sound familiar? It’s what cable providers do. We all pay a package fee, even if we use 10% of the channels offered. This fees is then disbursed across all partners which in aggregate is enough to fund content creators. Would you pay $20 a month for unlimited reading (to most sites)? I think that future is coming. This is no different from what you see with Netflix and Spotify. Wait a minute, couldn’t Facebook do this with Instant Articles, its product to help publishers deliver articles quickly while controlling the ad experience? Isn’t Apple doing something similar with News and Apple Music? Why, yes.

Facebook, Google and other Internet media giants will lead the way in acceptable internet advertising standards. Some ad blockers will agree to allow these non-disruptive ads in, others won’t. Depending on the level of adoption, this will make subscription / ad revenue dependent services tilt accordingly.

Advertisers will Demand Quality Impressions from Publishers (see below for more on this)

What do Good Ads Look Like?

I believe that ads do serve a need. They provide information for things that you may not be aware of, advertising is the origin of push discovery. If we remember traditional media, ads reached a happy balance for the user. When they begin to push too far (ridiculously obvious product placement), users push back, and the balance must be restored. This is what we see in internet advertising today when users install ad blocking.

I believe a large problem is the focus on pure CPM, the number of impressions, rather than the quality of that impression – are you giving a user enough time to focus on your ad without delivering in a way that is obnoxious? Think back to TV and magazines, in which I would argue, yes. The medium (magazine page, TV screen) switches completely over to the ad. In internet media, however, oftentimes, if I can just show some kind of banner on my site, and it’s then rendered somewhere on a person’s screen, I can say mission accomplished to the advertiser. From the advertiser side, I understand why this may not be so effective for my company.

Let’s look at an example below from IGN (screenshot from Sept. 30, 2015)

The “Wildstar” banner above is a normal banner. As you scroll down, it disappears. From my experience, you are probably scrolling down right away. If you put the ad in front of me, making me get through it, as discussed before, I will fight through it or leave. Thus, I can claim this as an impression for my CPM count, but I bet the advertiser is not too happy with its quality.

Let’s take another look at IGN below:

This is actually the full screen of IGN, with a “takeover” seen on the sides from Wildstar. Basically, a takeover means the advertiser takes the background of the site. As the user scrolls, the ad continues. It’s not obnoxious and has a chance to stay with the user, when he has time to process it. Perhaps he will never click on it or read it carefully, but that brand has a chance to sink in, as it might on TV or print. It doesn’t interrupt your experience but can still seep in.

It’s much more natural, and assuming the takeover doesn’t change when the user changes pages within IGN, pretty good. This an experience publishers should be providing, at higher cost, for clear resonance. Yes, there are lower quantities available, but the quality is higher, and publishers can and should charge accordingly for it to make up the difference. Programmatic ads should still be possible as standards are created on how to create takeovers.

There are other examples in online media today that I love. I experienced one on a long form article on The Verge. As you scrolled down, an ad would slowly appear in-between sections of content. You saw it coming, and you could keep scrolling to get past it. However, the size of the ad was essentially full screen, thus through the process of scrolling, you would experience it for a few seconds. Because the process was seamless and natural, as in magazine reading, you didn’t have to play whack-an-ad to close it. You experienced the ad at your own pace, the feeling was great. I saw this same form of ad on mobile through Bleacher Report’s app recently as well.

Those seconds of full screen bliss are an advertiser’s dream and I think they are directly comparable in attention to traditional media ads. Those small 200 x 200 banners that are hiding in some corner in-between content – don’t we all simply learn to ignore them completely?

Good ads have to parallel what we experience on traditional media (in terms of the mental process and stress level) – you can see them coming, you are not shocked into them, you take a natural action (like scrolling down).

Evolve or Die

Despite all the hoopla and concern over ad blocking, this is simply an evolutionary phase. Companies and users will adjust until there is a balance that creates a sustainable model for content. Publishers are right in that users don’t realize that they have to pay for content one way or another, but publishers shouldn’t fight momentum, trying to hold on to their idea of how that money should be generated.

I would love to hear what you think about the future of internet advertising! Feel free to comment below.

I am reading a Harvard case study about Netflix for a class at Kellogg right now and reading about its timing of switching to unlimited rentals in the summer of 2000 reminded me of when I first heard about the company that would become RedOctane, the producers of Guitar Hero (did you see: Rock Band is coming back) and a startup success story.

Ever wanted to play the latest and greatest games out of Japan, but don’t quite have the budget to do so? There are many titles that are already out that deserve a good run through, but with prices floating around $70 each, one cannot afford to play them all. Well one online retailer noticed this and decided to start a bold new venture: renting import Dreamcast games Online.

WebGameZone is taking the high price of 70 dollars per game and changing it to a simple $4.99 rental. The company is already known for being the largest online videogame rental store, but until now has never offered the latest Japanese titles.

So what does a five dollar fee get you? How does 10 days of usage sound? That’s right… you get over a full week of gaming for the price of a typical fast food meal. After you are done with the game, you just send it back in the pre-paid, pre-labeled box that is provided.

Obviously, we can’t guarantee the quality of the site’s service, but it is certainly something import-hungry gamers may want to check out. Thirty import titles will be made available at first, with more and more being added as time goes on. This is truly a unique venture, and will be interesting to see if it works out.

Both Mike Won and I read the same article and while I am not sure exactly what happened next, one of us found out the company was in Sunnyvale (in Silicon Valley, 20 miles away from where we lived in San Jose), and I contacted them right away about internships. I would have happily worked for free, but got a quick response from Juan, came in a few days later, met the rest of the team (Kai Huang, Charles Huang, Dean Ku, etc.) and essentially had a part time job (probably at $7.50 an hour) at the age of 19 shipping game discs and learning about Japanese import games for the Sega Dreamcast. This probably all happened within 10 days. I was employee #9 or #10 until I left to finish my degree at UC-Berkeley in 2002, but my time there in that first stint is summarized in my LinkedIn profile:

In my first experience with RedOctane (formerly WebGameZone), I started as an intern, learning about shipping logistics. Over time, I was promoted to Customer Service and given complete freedom (and responsibility) to interact with customers and learn how to resolve issues without backup support in a loss limited structure.

Through these experiences, I learned vital lessons about the human psychology, empathy, effective communication, and stress management, critical lessons I still use on an everyday basis.

Promoted from Intern/Shipping Logistics (2000) to Customer Service / Game Inventory Buyer (2001).

I do not really watch Shark Tank, but two recent episodes struck my interest. The first was the episode with Singtrix, which has a connection to my time with RedOctane and Guitar Hero. The other was about Coffee Meets Bagel, the January 9th episode (thanks to Kevin Tung Nguyen for sharing the episode) that you can watch below:

Coffee Meets Bagel (CMB) relates because of my work at FriendsPlus, which we sold pre-launch to Noi.vn, Vietnam’s largest dating service in 2013. Like CMB, FriendsPlus focused on creating a non-meat market dating environment focused on the needs of female users, encouraging offline meets between users who explicitly opted in to each other. Some commentary on the episode and CMB:

The team should have been prepared for questions about user numbers. By deflecting the question multiple times, one wonders if they have given different numbers to different people and thus could not say publicly on television what the current numbers were (they would not want to be shown lying), or if CMB is simply at the bottom of the range given (100-500K users). As Cuban implies, there is a big difference between 100K and 500K users, especially considering that CMB has been around for close to 3 years (more on that below) – it suggests limited market or non-compelling and non-naturally sustainable growth.

The team mentions that CMB was invested in by a Match co-founder. That person is Peng Ong, who I actually know. Tinder is invested in by Match, the firm. CMB launched in April 2012, 5 months before Tinder, but Tinder is estimated to have 50 million users today. The team cites Match’s 800M in revenue as a sign of their own potential. That’s the same logic that says you should automatically advertise on Facebook because it has 1 Billion users. Yes, there is some superficial logic there, but you need to delve a bit deeper.

The Sharks are right in that CMB can easily be copied – look at the popular Noonswoon from Thailand.

CMB’s revenue and users are a bit alarming. I discuss it over the next points.

Last year, CMB generated $87K in revenue. If that is $0.50 per user on average, this would imply 170K users. This is reasonable for this type of product and follows what the team said. I don’t know how long the average user stays with the product. If they actually have more than 170K users, revenue is actually less than $0.50 per user. Remember this $0.50 figure for later.

This year, CMB expects to make $1M USD, but expects to lose $1M, which means costs were $2M USD. Current user acquisition is $0.30 per user.

CMB expects to break even at $10M in revenue next year, from 4M users. They expect to spend 3-4M (let’s assume it’s 4M) in to bring on those new 4M users. That is $1 per user. They expect $2.50 per user in revenue, but did not include CMB’s existing users in that revenue figure. This leads me to believe that CMB user lifetime with the service is not particularly long (1 year or less) or that the number of current users and the revenue generated from them is not significant enough to include. This implies the lower user figure in the given 100-500K user range. Increased user acquisition costs suggests this product does not spread virally, something about it does not compel others to talk about it, or you are trying too hard to bring someone who may not be the right fit for your product. If this is the case, the projected gain in average revenue per user (ARPU) for these kinds of users is also a concern.

How did CMB estimate $2.50 per user per year moving forward? CMB is going to jump from $0.50 to $2.50 (500%) in 1 year? How does adding users generate more money per user? Since the revenue is from digital currency / microtransactions, does having more users make the product more sticky? If so, this implies the business is not sustainable now. If that is true, and focusing on this niche is not sustainable, what does this imply about the value the product is creating for its current users? Does having more users actually mean more date / chat frequency which means I need to buy more microtransactions? Again, this is not a meat market like Tinder in which you go on to browse (consume) through people – for Tinder, you need a ton of users. For CMB, you are getting one match per day carefully selected for you. Are there more types of transactions that CMB will be processing in the future that will generate new forms of revenue?

Let’s compare CMB to a Facebook type of product. Facebook generates more revenue by adding more business models. Example, Facebook could sell different types of ad products, and can charge more money with an increased user base (market power) increasing the efficiency of those ads. It can also take a share of revenue that is generated within the platform (apps, games), or sell emoticons. Thus, more users could lead to more revenue, but you also need to add more models for those users, it’s not automatic. This concerns me about CMB – it currently just sells digital currency.

Why is there such a high burn rate (company spending)? With $2M in expenses, this is over $150K in burn per month. You might want to look at CMB’s jobs page to find out where the money is going: https://coffeemeetsbagel.com/jobs/. From my experience: company trips costs a sh*tload of money. Based on LinkedIn, I found about 15 full-time employees at the company. Let’s say on average, each employee costs the company $100,000 each per year (this is low when you include office space, benefits, etc.). The founders mentioned they each make 100K, which for the Bay Area, is low. Based on CMB’s $1M revenue, and $1M in losses figure, however, the team is suggesting they spend 133K per employee per year, which is possible. (This doesn’t include marketing, which at .30 per user at 170K users, would only be about 50K and can be ignored for now). I know that the Bay Area is a different beast with employee expectations, but in my opinion, startups in need of cash need to learn how to conserve cash better.

CMB will break even at $10M in revenue and 4M+ users. With $4M going in advertising, where does the other $6M go? If you stick to the $133K per employee figure, the company would need to grow to 45 people. Perhaps some people are getting raises. Infrastructure should not be a particularly significant cost yet. I don’t think you can have 45 people in a co-working space either. If the cost goes to $150K per employee, that is still 40 employees. If the team can cut the fancy office, parties, trips and focus on profitability, I expect there is a good amount of fat that can be cut. (One of RedOctane’s first offices was a big warehouse with no air conditioning in Sunnyvale – no frills worked out for them)

I wonder if CMB’s quoted revenues include the 30% share that is given to Google Play and iTunes for microtransactions. Otherwise, there is no cost of goods (COGS).

Why does CMB need to grow to be profitable? This, along with CMB’s slow user growth after nearly 3 years troubles me. I could understand the growth in the sense it’s not a meat market app. It’s for people who want quality, real relevance over gross quantity. But why can’t it be profitable now? This makes me question the revenue model. Is CMB going against its core by going to mass-market advertising? If the app is not for everyone, it should be positioned accordingly. I don’t see how growth rescues them long term.

So what should CMB do? I would consider changing to a premium / subscription model to get revenue from more (higher % of users pay, but less overall users) users at higher rates and focus on that smaller niche audience to reach profitability. Do people pay for love? Yes, as long as it is provides real value. CMB seems to be providing that.

The Mark Cuban $30M offer: I don’t think he is actually making the offer, he is saying “what if”, to which the proper response to a hypothetical is of course no. If you say yes, you have publicly given a limit to what your company is worth (the team has suggested a $10M valuation with $500K for 5%) for no reason. You would never want to create the sense you do not believe in your product to preposterous levels. If it were a legit offer, I believe they should have taken it. 3X valuation is nothing to joke at, as much as the team may claim to look at Match’s $800M in revenue or Tinder’s billions in valuation. The team suggested CMB is a cash hungry business intent on growth. CMB received $2.8M in venture capital last May, which would not cover its marketing budget for this next year. Yet, its is only asking for 500K from Shark Tank. This leads me to believe CMB is mainly on Shark Tank for the PR and don’t want to give up very much equity, has another round coming, or does not intend to go with its stated marketing plan at all – it would not have the money for it. If it needs to grow massively to become profitable, CMB has no other option than to take the buyout offer.

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I write whatever I feel like, and often do so foolishly. Opinions here are always my own unless explicitly mentioned otherwise.
Professionally, I am a startup warrior and I hold a MBA from Kellogg (Northwestern). I live in the San Francisco Bay Area (California).